Alcera, Vincent Luigil C.

BSA 2-6

Module 6 Activities/Assessments:
1. Research on the Philippine Stock Exchange, its functions and its roles in the Philippine
financial market. Enumerate criteria how companies can list in the PSE and the disclosure
requirements for listed companies.

The Philippine Stock Exchange

The Philippine Stock Exchange or PSE is the national and sole stock exchange of the Philippines. PSE is
considered as one of the oldest stock exchanges in Asia Starting in 1927 when it was still Manila Stock
Exchange. The trading floor of PSE is currently situated in the PSE Tower in Bonifacio Global City,
Taguig. The PSE is composed of a 15-man Board of Directors with Jose T. Pardo as Chairman.

Functions and Roles

Formerly, PSE used to be an on-profit, non-stock, member-governed organization. In 2001, PSE was
transformed to its current structure which is a shareholder-based, revenue-earning corporation headed by
a president and a board of directors. PSE eventually listed its own shares in the exchange under the
ticker PSE. The PSE through the Philippine Central Depository (PCD) uses the computerized book-entry
system to transfer ownership of securities from one investor to another, thus, eliminating the need for
physical exchange of scrip between the seller and buyer.

The PSE regulates trading activities through the Capital Markets Integrity Corporation (CMIC), a spinoff of
the Market Regulation Division of PSE, to monitor and penalize trading participants that violate the
Securities Regulation Code and its implementing rules and regulations; the Anti-Money Laundering Law
and its implementing rules and regulations, the Code of Conduct and Professional Ethics for Traders and
Salesmen; CMIC Rules; and other relevant laws and regulations. The CMIC shall also have the authority
to investigate and resolve trading-related irregularities and unusual trading activities involving issuers
based on complaints received, findings and reports.

PSE has been granted a “Self-Regulatory Organization” or SRO status by the SEC in June 1998. This
means the PSE can implement its own rules and set penalties on erring trade participants and listed
companies. Formerly, PSE used to be an on-profit, non-stock, member-governed organization. In 2001,
PSE was transformed to its current structure which is a shareholder-based,

Criteria for Enlistment

a. Track Record of Profitable Operations — the company must have cumulative consolidated
earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding nonrecurring
items, of at least P50 Million for three (3) full fiscal years immediately Preceding the application
for listing and a minimum EBITDA of P10 Million for each of the three fiscal years. The applicant
must further be engaged In materially the same businesses and must have a proven track record
of management through the last three (3) years prior to the filing of the application. To show this,
the company submits audited consolidated Financial Statements for the last three (3) full fiscal
years preceding the filing of the application to the PSE. The Financial Statements must be
accompanied by an unqualified external auditor's opinion.

b. Exception to the the year Track Record Requirement - the following are the exceptions to the
three (3) year track record rule:

 The company has been operating for at least ten (10) years prior to the filing of the
application and has a cumulative EBITDA of at least P0 Million for at least two (2) of the
three (3) fiscal years immediately preceding the filing of the listing application.
 The company Is a newly formed holding company which uses the operational track
record of its subsidiary.
Alcera, Vincent Luigil C.
BSA 2-6

c. Positive Stockholders’ Equity — The company must have a positive stockholders' equity in the
fiscal year immediately preceding the filing of the listing application.

d. Market Capitalization — At listing, the market capitalization of the company must be at least 500
Million.

e. Operating History — The company must have an operating history of at least three (3) years prior
to its application for listing.

f. Minimum Capital Requirement — The company must have a minimum authorized capital stock of
P500 Million, of which a minimum of twenty-five percent (25%) must be subscribed and fully paid.

g. Minimum Offering to the Public — The minimum offering to the public for initial listing shall be
based on the following schedule:

Market Capitalization Public Offer

Not exceeding P500M 33% or P50M, whichever is higher
Over P500M to P1B 25% or P100M, whichever is higher
Over P1B to P5B 20% or P250M, whichever is higher
Over P5B to P10B 15% or P750M, whichever is higher
Over P10B 10% or P1B, whichever is higher

h. Minimum Number of Stockholders — Upon listing, the company shall have at least one thousand
(1,000) stockholders, each owning stocks equivalent to at least one (1) board lot. The
requirement to have at least one thousand (1,000) security holders each owning securities
equivalent to at least one (1) board lot is only required upon listing. Once listed, companies shall,
at all times, maintain a minimum percentage of listed securities held by the public of ten percent
(10%) of the listed companies issued and outstanding shares, exclusive of any treasury shares,
or as such percentage that may be prescribed by the Exchange.

i. Valuation of Assets - When required by the PSE, the company shall engage the services of an
independent appraiser duly accredited by PSE and SEC determining the value of its assets.

j. Full Payment of Issued and Outstanding Shares — The company shall Cause all its subscribed
shares of the same type and class applied for listing to be Paid in full.

k. Investor Relation Program — The company shall have an investor relation program to ensure that
information affecting the company is communicated Effectively to investors. Such program shall
include, at the minimum, a corporate website that contains, at the minimum, the following
information:

 Company information — organizational structure, board of directors, and management

team;
 Company news — analyst briefing report, latest news, press releases newsletter (if any);
 Financial report — annual and quarterly reports, at least for the past 2 years;
 Disclosures — recent disclosures to the Exchange and the Commission for the past 2
years;
 Investor FAQs — commonly asked questions of stockholders:
 Investor Contact = email address for feedback/comments, shareholder assistance and
service; and
 Stock Information — key figures, dividends, and stock information.

A company that incurs negative stockholders’ equity for three (3) consecutive years shall be subject to
delisting, in accordance with the rules of the Exchange. The delisting of the company’s securities shall
take effect thirty (30) days from approval by the PSE Board of Directors of the said delisting. The
Alcera, Vincent Luigil C.
BSA 2-6

Exchange shall send notice of such delisting immediately to the listed company and the Securities and
Exchange Commission. The Exchange shall likewise publish an announcement relative thereto on the
Exchange website.

Disclosure Requirements for Listed Companies

All companies listed in the PSE is required to comply with its disclosure rules. The basic principle of the
Exchange is to ensure full, fair, timely and accurate disclosure of material information from all listed
companies. This principle shall apply to all the required disclosure requirements of listed companies.

Corporate disclosures are classified into two: the structured and the unstructured corporate disclosures.
Structured continuing disclosures are reportorial requirements submitted within specific time frames such
as annual, quarterly and monthly reports. Unstructured continuing disclosures are communications of
corporate developments as they happen and are intended to update the investing public on the activities,
operation and business of the company.

Structured continuing disclosures include the following:

 Annual report (SEC Form 17-A) — To be submitted within 105 days after end of fiscal year.
 Three Quarterly Reports (SEC Form 17-Q) — To be submitted within forty-five (45) days from
end of the first three (3) quarters of the fiscal year.
 Reports on Beneficial Ownership.
 Other periodical reports to update and keep current information on the operation of the business
and financial condition of the company.

2. Essay: Discuss each share valuation method and distinguish its differences and where and
how it should be used.

Dividend-based Valuation

The zero-growth model is an easy to use formula that calculates the value of shares that pay dividends
that experience zero growth from issue. The assumption here is that the dividends are constant in the
future and will be used for valuing preference shares. This model utilizes the expected dividend share and
the required return on its stock. The formula is as follows:

Expected Dividend per Share at end of Year 11

ShareValue=
Required Return(% )

The constant-growth model is used to determine the intrinsic value of a stock based on a future series
of dividends that grow at a constant rate. The assumption here is that the dividends will increase at a
constant rate indefinitely but will always lower than the required rate of return. The formula is as follows:

Expected Dividend per Share at end of Year 11

ShareValue=
Required Return ( % )−Growth Rate (%)

The variable growth model is a dividend valuation approach that allows for a change in the
dividend growth rate. This model assumes that dividend may grow at varying rates and may go up or
down depending on business and economic conditions. There are four steps to consider in calculating the
variations in growth in the valuation. The steps are to (1) compute for the value of cash dividends based
on the estimated growth rate for each individual year; (2) compute for the present value of each dividend
for each year during initial growth period; (3) compute for the value at the end of the initial growth period
by using the expected growth rate until infinity through the constant growth model. Compute the present
value of this value in relation to current year; and (4) Add present value computed in steps 2 & 3.
Alcera, Vincent Luigil C.
BSA 2-6

What to remember is that if a company or individual desires to compute for the share value assuming that
its dividends are unchangeable over time, then the zero-growth model may be utilized. However, there
may be instances where the dividends to receive are expected to increase at a constant rate, then the
constant-growth model should be used. But remember that to use the said model would require its
growth rate to be lower than its required return rate. On the other hand, the variable growth model
should be used when it is expected that its dividends may grow at varying rates (either up or down) unlike
the constant growth model where the dividends grow at a constant rate.

Other alternative valuation methodologies

The free cash flow methodology is an alternative besides using the dividend-based share valuation
techniques. Here, the cash flows available to debt creditors and shareholders are referred as the free
cash flow assuming that all other operating obligations are met. Instead of using dividends, the model
uses the free cash flows available to the providers of the funds. The free cash flow valuation model
estimates the value of the entire company as a whole. Therefore, its computation only requires the
isolation of the value of ordinary shares.

The book value per share refers to the amount per share that will be received if all of the company’s
assets are sold based on its exact book or accounting values, which can be easily computed since the
book value can be easily derived from the accounting records of the firm. The assumption in this method
is that it does not consider the future earning potential of the firm. Another drawback in this model is that it
heavily relies on the historical balance sheet data. When a company is to use this methodology, it should
be noted that this model does not have any link or relationship to the true value of the firm in the market.
The formula is as follows:

Book valueof assets−Book value of liabilities−¿ Book value of preferences shares

Value per share=
Total No .of Outstanding Shares
The liquidation value per share can be used to compute the actual amount per share that will be
received assuming that all assets are sold based on their current market value and all liabilities are fully
paid. Compared to the book value methodology, the liquidation value per share is a more practical
approach considering that the latter approximates that assets will be sold based on its market value. The
drawback in this methodology is that this approach still lacks any consideration on the future earning
potential of the company, which is similar to the book value per share methodology.

The price/earnings (P/E) multiples method computes for the share price using the price-earnings ratio.
When the P/E ratio is computed, the amount obtained would represent the amount that investors are
willing to pay for each peso of earnings. The average P/E of a firm can be used by investors as reference
point to determine the company’s value. However, such valuation can only be done under the assumption
that the average firm of the industry is valued.

The P/E multiples is a popular approach in estimating how much the shares of the firm are valued, which
is calculated by multiplying the expected EPS of the company by the average P/E ratio for the company
(where the average is similar, which can be researched from publicly available information).

To summarize:
 Free cash flows methodology - estimates the value of the entire company as a whole.
 Book value per share - computes the amount per share that will be received if all of the
company’s assets are sold based on its exact book or accounting values.
 Liquidation value per share - used to compute the actual amount per share that will be received
assuming that all assets are sold based on their current market value and all liabilities are fully
paid (more practical approach compared to the book value per share methodology considering
that the latter approximates that assets will be sold based on its market value).
Alcera, Vincent Luigil C.
BSA 2-6

 Price/Earnings Multiples - computes for the share price using the price-earnings ratio, which
would represent the amount that investors are willing to pay for each peso of earnings.

Hybrid and Derivative Securities

Hybrid Securities are financial instruments consisting of characteristics of both debt and equity
instruments. Examples of hybrid securities are: stock purchase warrants (which are instruments that give
its holders the right to purchase a certain number of shares of a company at a stated price) and
convertible securities (which are bonds or preference shares that can be converted into ordinary shares in
the future).

It should be remembered that they are known to be a greater risk for hybrid securities than the bonds or
stocks they incorporate. They seem to have less liquidity than a stock, making it more difficult for your
portfolio to transfer a bad investment in and out. They have, meanwhile, more exposure to the economy
than a bond, making them less stable. Yet, with the correct portfolio, this can still be a very useful
investment. In particular, because of their greater risk profile, a hybrid security will generally have a higher
rate of return than an otherwise comparable bond.

Derivative securities differ from hybrid securities that they hold no characteristics of either debt of equity
securities. The most popular derivative security is the options, which is a financial instrument that enables
holders to purchase or sell (call and put option respectively) a specific asset wherein the holder is give the
decision to exercise such actions. To summarize, options are contracts that give the right but not the
obligation to buy or sell an asset. Investors mainly utilize option contracts when they don't want to take  a
position in the underlying asset but still want to increase exposure in case of large price movement.